Summary: In a legal battle between Sharp Business System and the Commissioner of Income Tax, the Supreme Court addressed whether the non-compete fee paid by Sharp to Larsen & Toubro (L&T) should be considered a capital or regular business expense. The court ruled it as a regular business expense, allowing it as a deductible under Section 37(1) of the Income Tax Act.
Sharp Business System, a partnership between Sharp Corporation, Japan, and Larsen & Toubro Limited (L&T), paid Rs. 3 crores to L&T in 2001 to prevent them from entering the electronic office products market in India for seven years. Sharp claimed this amount as a deductible regular business expense, but the Income Tax Department disagreed, treating it as a capital expense.
The Tax Officer argued that the Rs. 3 crores payment gave Sharp a long-lasting business advantage by eliminating competition, thus classifying it as a capital expense. This decision was supported by the Commissioner of Income Tax (Appeals), who also denied benefits for reducing value over time under Section 32(1)(ii) of the Income Tax Act.
Sharp's appeal to the Income Tax Appellate Tribunal (ITAT) was also rejected. The ITAT agreed that the non-compete fee did not qualify as a regular business expense and was not eligible for depreciation, as it did not create an intangible asset.
On November 5, 2012, the Delhi High Court rejected Sharp's appeal, ruling that the non-compete fee was a capital expense and not eligible for depreciation. The court emphasized that the non-compete right was a personal agreement with L&T, not a universal business right.
The Supreme Court overturned the Delhi High Court's decision, ruling that the non-compete fee was indeed a regular business expense. The court noted that the payment did not create a new asset or monopoly for Sharp; it merely helped run the business more efficiently.
"Non-compete fee only seeks to protect or enhance the profitability of the business, facilitating carrying on of the business more efficiently and profitably." - Supreme Court Judgment
The Supreme Court allowed Sharp's appeal, setting aside the Delhi High Court's order. The payment to L&T was deemed an allowable regular business expense under Section 37(1) of the Income Tax Act.
Judges Involved: - Justice Manoj Misra - Justice Ujjal Bhuyan
Date of Judgment: December 19, 2025
Location: New Delhi
